1

Investing in Cryptocurrency, the Labyrinth of Tax Reporting

This article is an extract of the CH Alliance yearly publication

This article is an extract of the CH Alliance yearly publication on Innovation for

Financial Services. This 2019 edition includes several articles on the “Tokenization”

of the economy, expressed by the Initial Coin Offering (ICO) wave, which is now

becoming a semi-regulated activity in major financial centers - the first step to

global recognition. The remaining articles provide insights on hot topics for

several Financial Services sub industries: AI for Wealth Management, chatbots

in B2C Banking, autonomous vehicles and catastrophe bonds in Insurance, hot

Fintech for Real Estate finance management and data visualization in CIB.

CH&Co. is a leading Swiss consulting firm focused exclusively on the Financial

Services Industry. With 7 offices worldwide and over 300 professionals, we

proudly serve the industry’s major banks, insurance companies, wealth managers

and investment funds.

To read more please visit Chappuishalder.com

2

Investing in Cryptocurrency, the Labyrinth of Tax Reporting

Cryptocurrency markets gained significant

power over the past three years. With their

rapid surges and collapses in value, virtu-

al currencies have shifted into the public eye

in recent years. Numerous investors started

trading cryptocurrencies on brand new online

platforms with the hope of making some good

money quickly. But this craze also woke up the

interest of regulators and tax administrations.

Headache replaces excitement when the time

for tax reporting comes. With no real definition

or classification of cryptocurrencies and the

difficulty in determining the average acqui-

sition prices, tax reporting has become a real

challenge for cryptocurrency investors, who

cannot count on the help of crypto-exchange

platforms.

Tokenisation challenges and opportunities

CRYPTOCURRENCY, A NEW ERA OF INVESTMENTS

Like all investments, undisclosed

profits will be sanctioned and

now more than ever, with the

emergence of cryptocurrencies,

regulators are eager to catch

uncompliant investors with brand

new regulations.

3

Cryptocurrency Description

Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network.

Ripple connects banks, payment providers, digital asset exchanges and corporates via RippleNet to provide one frictionless experience to send money globally.

Ethereum is a decentralized platform taht runs smart contracts: applications that run exactly as programmed without any possibility of douwntime, censorship, fraud or third-party interference.

Litecoin is a peer-to-peer internet currency that enables instant near-zero cost payments to anyone in the world. Litecoin is an open source, global payment network that is fully decentralized without any central authorities.

Other high volume traded cryptocurrencies

A strong interest in crypto investments from retail investors

A cryptocurrency is a digital currency created to be

a medium of exchange using cryptography technol-

ogy to secure transactions. It differs from fiat curren-

cies given its decentralized nature, pseudonymity,

immutability and divisibility.

Cryptocurrency markets gained significant power in

the past 9 years due to an exponential increase in in-

novations and the development of new technologies.

Initially reserved for well-informed and early inves-

tors, cryptocurrency investments are now available

Main cryptocurrencies

Bitcoin

Ethereum

Litecoin

xrp

to more mainstream individual and institutional in-

vestors with a large panel of cryptocurrencies.

Bitcoin, Ethereum, XRP are the three biggest cryp-

tocurrencies in terms of traded volumes, according

to coinmarketcap.com. Cryptocurrency trading as

gained a notable importance due to the high level of

volatility, the hope of quick and easy gains and the

opportunities created by the lack of regulation and

market structure.

Source: bitcoin.com, ripple.com, ethereum.org, litecoin.com, eos.io, cardano.com, iota.org, dash.org, tron.network

4

Strong interests from worldwide tax administrations

Cryptocurrency exchange platforms and tax reporting

Even though people who invested in cryptocurren-

cies probably did not consider tax implications, tax

administrations in the U.S. and European Union

have demonstrated a strong interest in this matter.

At stake, the taxation of the huge monetized profits

realized by crypto investors in strong opacity. The In-

ternal Revenue Service (IRS) in the U.S. won a court

case against Coinbase. The court ordered Coinbase

to report 14,355 users who had traded more than

$20,000 worth of Bitcoins between 2013 and 2015.1

But today, Coinbase is the only cryptocurrency plat-

form that gave its users’ data to a tax administration.

For the moment, administrations have little power

and control over these players generally located in

Main Exchange Platforms

The cryptocurrency market is an uncontrolled and

unregulated market, which is strongly fragmented.

Multiple players around the world have created

foreign countries to obligate them to improve trans-

parency on investors’ data. Moreover, they have few

tools to control and detect potential fraud.

In most countries, it is investors’ responsibility to

report taxes on all gains and income to their tax ad-

ministration. But the exercise can rapidly become

challenging, and individuals are not always the ones

to blame. The lack of regulation in the cryptocur-

rency industry drives investors to find grey-area

solutions to reporting taxes on their highly-volatile

returns. The difficulties come from the absence of

strong tax reporting platforms and the lack of specif-

ic tax guidance from government agencies.

exchange platforms to trade and exchange crypto-

currencies. The most famous exchange platforms in-

clude Kraken, Coinbase, Bitfinex and Gemini.

Luxembourg

Singapore

Hong-Kong

New Zealand

USA

USA

South Korea

Source: kraken.com, coinbase.com, gemini.com, upbit.com, bitfinex.com, bitstamp.net, huobi.com, wex.com

1 https://www.fool.com/taxes/2018/05/03/3-ways-the-irs-is-taxing- cryptocurrencies.aspx

5

TAX REGULATIONS ON CRYPTO-CURRENCY ASSETS: GREY ZONE

Different Countries, Different Regulations

The legal status of cryptocurrencies varies from

country to country. Some countries have not yet de-

fined the legal status of cryptocurrencies. In these

circumstances, the tax implications for cryptocur-

rency investments are vague, and there will be lots

of questions ahead.

As cryptocurrency does not have a universal defi-

nition, investors from various countries are facing

different tax reporting amounts for the same invest-

ments.

For example, in the USA, the IRS published a short

notice in 2014 in which it defined cryptocurrencies

as property, similar to an investment in real estate,

bonds or stocks. The tax consequence for cryptocur-

rencies starts the day investors place their cryptocur-

rency orders.

Different uses, vague tax consequences

Different cryptocurrency transactions are also play-

ing a key role in tax administration. Since crypto-

currency and blockchain technology are constantly

progressing, their usage is evolving as well. There is a

huge panel of cryptocurrency transaction options:2

Legal Status & Tax Implementation by Country

Trading cryptocurrencies is a taxable event. Due to fair

market value calculation requirements for tax reporting

purposes, investors are facing serious challenges in

calculating such value in USD at the time of the trade.

Exchanging tokens is a taxable event. From a tax point of

view, exchanging tokens is the same as selling them.

Buying cryptocurrencies with dollars is not a taxable event.

Selling cryptocurrencies with other currencies is a taxable

event.

Having services, products or a salary in exchange for

cryptocurrencies is treated as regular income at the time of

receipt.

Spending cryptocurrencies is a taxable event. Holding time

is crucial for tax rates on capital gains.

Airdrops, hard forks (attribution of token for free) are

considered as income on the day of the event.

Mining coins is considered as income equal to the fair market

value of the coin on the day it was mined.

ICOs do not enjoy tax-free treatment for raising capital.

Country Legal status Tax consequences

United States of America

PropertyCalculated based on the coin’s value as of the date it was traded

Japan Legal method of payment 15-55 percent, based on the volume

South Africa Assets of intangible nature18 percent (capital gains tax): 18-45 percent (normal income tax)

Swiss Not DefinedWealth tax (determined at the end of the year, based on income)

United KingdomInvestments (small-scale holding): working capital (if used regularly)

Free, if below £11.850, then up to 45 percent

Source: cointelegraph.com

2 IRS Notice 2014-21

6

No Tax Advisory Option Tax Advisory Ability Option Core Business Tax

According to our recent 2018 crypto investors sur-

vey, tax reporting complexity is a key concern for

62% of crypto investors3. Most platforms are not

helping their users in the tax reporting process. For

retail investors, when they sell bonds or shares, banks

send a tax form with all the necessary information

to prepare their tax return. This is not the case for

cryptocurrency exchange platforms. For instance,

Coinbase only issues a statement if the investor re-

alized more than $20,000 in gains and made a least

200 transactions over the year4. Besides Coinbase,

no other platform discloses data to the IRS, or to in-

vestors. From the regulator’s standpoint, there is a

serious lack of information and guidelines for deter-

mining which investors need to file a tax return.

B2C

B2B

No support from the platforms or stakeholders for individual investors

To complete the tax reporting exercise, investors

need to know the basics, i.e. the purchase date, the

purchase price, and the sales date and price. Most of

the time, the base price is the purchase price, but it

needs to be adjusted for things like splits, dividends,

return on capital distributed—known in the crypto

language as ICOs, hard forks or airdrops. This can

become very confusing for purchases made at differ-

ent times. But since it is the investors’ responsibility

to prepare their tax returns, most of the major plat-

forms are not informative enough for their users to

prepare them efficiently.

Positioning of cryptocurrency players from a tax

perspective

3 Crypto-Investor Observatory – July 2018, COQONUT and CH&Co. http://www.chappuishalder.com/sites/default/files/crypto_investor_observatory_june_2018.pdf4 Coinbase website

7

Exchange platform Tax advice

Coinbase provides Form 1099-K to certain business customers and GDAX customers that have received at least $20,000 cash for sales of virtual currency related to at least 200 transactions in a calendar year.

It is investors’ responsibility to determine what, if any, taxes apply to the trades they complete via Services, to report and remit the correct tax amount to the appropriate tax authority. The platform is not responsible for determining whether taxes apply to traders or for collecting, reporting, withholding or remitting any taxes arising from any trades.

Tax information is not available on the Bitfinex website.

Under IRS guidance, Gemini is not required to issue Form 1099-B since digital currency sales are currently regarded as personal property sales.

No tax information is available on the Binance website.

Three flat fee offers for crypto investors (only transactions, hard forks and airdrops are taken into account). Visor tool harnesses machine learning to pinpoint exact deductions, giving advisors a data-driven understanding that maximizes savings.

Works with main cryptocurrencies. Import of cryptocurrency portfolio on main exchange platform, spending, wallets, mined coins and income. Possibility to export capital gain to TurboTax and TaxAct. Caculates tax for U.S., Canada, Australia, Germany and the U.K. Purposes a professional package for accountants. Works with Happy Tax and Visor.

CoinTracking analyzes the trades and generates real-time reports on profits and losses, the value of your coin portfolio, realized and unrealized gains, and on taxes. Can operate with all 5,919 existing currencies and the main exchange platforms and wallets.

CryptoTaxPrep.com by Happy Tax helps U.S. clients with income from all types of cryptocurrency. It works in collaboration with U.S.-based licensed certified public accountants and targets different types of client: miners, day traders, retail investors, businesses accepting bitcoin as a payment method.

Crosslaw is helping clients throughout the United States with tax preparation and tax consultation related to cryptocurrency investments. They neither propose API to import trade history or wallets nor automatic system for tax reporting.

TaxToken focuses on modernizing personal accounting. It offers an automated, intuitive solution using blockchain technology.

LibraTax is a crypto accounting solution that tracks crypto activity and establishes a cost basis to calculate capital gains and losses and report taxable events.

Crypto Tax Advisors offers assistance from tax experts who are cryptocurrency insiders to help individu-als handle their cryptocurrency tax issues.

Coqonut provides a white-label solution that helps wealth managers and banks to include cryptocurren-cy assets in their existing reporting and analysis, to better serve the financial institutions’ clients.

8

AN OPPORTUNITY FOR FINAN-CIAL INSTITUTIONS TO PROPOSE NEW VALUE-ADDED SERVICES TO THEIR CLIENTS

In this context, it could be tempting for investors to

skip out on their taxes because no one really knows

about their capital gains. But in the future, tax ad-

ministrations may discover those investments and

send the bill with penalties and interest. Forewarned

investors start looking for solutions to help them ac-

complish their duty. This is an important opportuni-

ty for financial institutions to innovate and propose

new solutions, including tax reporting.

Possible collaborations between financial institu-

tions and exchange platforms could be an important

aspect of innovation with the transfer of investors’

information via API to create a seamless client jour-

ney: average acquisition price information, list of ac-

quisitions and disposals, holding period.

Solutions could be enhanced with value-added ser-

vices based on the same data, such as:

Tax reporting: capital gains report, tax regulation for

different countries, LIFO/FIFO/average costing calculation,

export into accountant software

Performance reporting: performance analysis and

visualization, history, realized and unrealized gains

Consolidated dashboard: interactive search and consolidated

views from various platforms and types of transaction

Data import: API, CVS file, number of exchange platforms

proposed, import of mining income from addresses, import

of spending from crypto wallets

Historical and analytical tools: historical charts, analysis

tools, quotes

Tax services are very limited so far

Some online platforms and tax advisors have already

seized this opportunity and offer new tax reporting

tools; however, they remain very manual with no

direct connections to market exchanges.

None of the major financial institutions provide

solutions in this field, even if they already have

implemented personal finance management

applications.

CLOSING WORDS: THREE FIRMS ARE SHOWING THE WAY

Cryptocurrency markets expanded dramatically,

but tax reporting remains a burden for investors due

to the lack of relevant tools.

Financial institutions can play a key role in resolv-

ing this tax dilemma. They have a real chance to

innovate and implement value-added solutions for

clients while finding a solution to the tax-reporting

maze.

The matrix shows that there are three tax advisory

companies that offer B2B solutions: LibraTax, Cryp-

to Tax Advisors and Coqonut.

Up until recently, LibraTax had been focusing on in-

dividual tax advisement but in May 2018, the com-

pany announced that they would be producing a

platform called Libra Crypto Office aimed at institu-

tions involved in regular crypto transactions.

Crypto Tax Advisors, has a special service for tax

professionals who are coached, advised and trained

on crypto activities.

Coqonut, is the only fully-automated solution that

financial institutions can use through white label-

ling to provide tax reporting services to their own

clients.